The euro traded in a narrow range against the US dollar during early Asian hours on Tuesday, hovering around 1.1420 after notching three consecutive days of gains.
A business and consumer survey report released on Monday showed a modest improvement in the Eurozone's Economic Sentiment Indicator for June, though it remains significantly below pre-conflict levels. Concurrently, employment expectations have weakened notably.
Against a backdrop of gradually easing inflationary pressures, the question of whether the European Central Bank still needs to continue raising interest rates is becoming increasingly pressing.
Fortunately, Europe's primary concerns have shifted from fuel shortages to extreme heat—while still detrimental to the economy, this is undoubtedly preferable to another energy shock.
Economic Sentiment: A Cautious Uptick on a Weak Foundation
In June, the Eurozone's Economic Sentiment Indicator rose from 93.7 to 95.0, marking a second consecutive month of mild improvement. It is noteworthy that most of this survey was conducted before the US-Iran agreement was reached; if this pact holds, subsequent sentiment readings could improve further.
However, output survey results for June were disappointing for both industry and services. The Eurozone appears set to end a poor quarter on a weak note, with the risk of economic stagnation being very real. A slight consolation is that business expectations for the coming months are recovering.
Deteriorating Employment Outlook: Underlying Concerns Emerge
A concerning development is the clear weakening in employment expectations. The June survey indicates that respondent firms have significantly scaled back plans to hire new staff in the coming months. This measure has declined further compared to previous months, hitting a recent low. This not only reflects business caution regarding the economic outlook but could also persistently hinder the services sector's recovery.
As the primary driver of employment in the Eurozone, a reduction in hiring appetite within the services sector will directly impact overall labor market vitality. If this trend continues, unemployment rates could rebound in future quarters, particularly in countries like France, Italy, and Spain where labor markets are already more fragile. Analysts point out that despite gradually easing inflationary pressures, businesses still face multiple headwinds including high financing costs, demand uncertainty, and geopolitical risks, leading to more conservative hiring decisions.
Furthermore, the impact of extreme heat on outdoor work and service industries cannot be ignored, potentially further suppressing short-term hiring demand. While Europe has seen some relief from the energy crisis, the continued deterioration in employment expectations remains a significant concern for the economic recovery. The European Central Bank may need to pay closer attention to labor market signals when assessing monetary policy to avoid exacerbating employment pressures through excessive tightening.
Inflation Signals: Price Expectations Fall Sharply
At a critical juncture when inflation worries had resurfaced, both industrial and services selling price expectations fell rapidly in June. This indicates that core inflationary pressures had already begun to ease well before the US-Iran agreement and the subsequent sharp drop in oil prices.
Looking at corporate pricing behavior, while firms are still passing on high costs to consumers, the pace at which they plan to raise prices appears to be slowing—a structural shift worth monitoring closely.
Implications for ECB Policy
For the European Central Bank, the core question is how much confidence it places in the fragile US-Iran agreement. On the surface, the window for raising interest rates appears to have closed: oil prices are falling rapidly, economic growth is sluggish, and corporate pricing momentum is waning.
However, risks cannot be ignored—if the agreement collapses and problems resurface, inflationary pressures could rebound swiftly. Therefore, taking more time to observe developments before the next interest rate move is not a bad strategy.
For the ECB, July might be a good opportunity to pause and observe—much like the "summer lull" experienced in other parts of Europe.
On the daily chart, the euro versus US dollar pair remains in a clear downtrend, having weakened consistently from its April high of 1.1848. After recently testing a phase low of 1.1324, it has seen a modest rebound. The moving average system is in a full bearish alignment, with the MA20 (1.1493), MA50, MA100, and MA200 exerting downward pressure from top to bottom. The short-term rebound is being resisted by the 20-day moving average, while medium-term moving averages are also turning downward, indicating the broader bearish trend remains unchanged.
In terms of technical indicators, the MACD shows a DIFF value of -0.0063 and a DEA value of -0.0057, with both lines operating below the zero line. The MACD histogram is extremely short, showing only a faint recovery signal. While bearish momentum has slightly diminished, no effective bullish reversal has formed. The RSI reading is 37.62, residing in the neutral-to-weak range between 30 and 50, not yet in oversold territory. Downward momentum has not been fully exhausted, limiting the strength of any rebound.
As of 8:00 AM Beijing Time, the euro versus US dollar was quoted at 1.1418/19.
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